The Payer C Change: From Customers to Competitors

Imagine the ultimate pharmaceutical competitor, one with the power to allow or deny drug approval and access; regulate and restrict indications, promotions, and utilization; demand rebates and force price cuts; ignore patents and transfer licenses; prevent corporate acquisitions and licensing deals; and support rival companies and products. This is not a pharma nightmare but rather an industry reality. Over the past 15 years, payers have evolved from their traditional role as one of the industry's three main customers to pharma's most formidable competitor.

Payers are neither "direct competitors" like manufacturers of innovative or generic products nor "indirect competitors" like suppliers of substitute offerings like OTCs, supplements, medical devices, procedures, or technologies. Payers have become "budget competitors," an entirely new form of competition marked by conflict with pharmaceutical companies for an increasingly limited amount of funds and resources. Understanding why and how this payer shift to dominance occurred is critical for pharmaceutical professionals in adjusting their business model to manage threats and opportunities from this new landscape of supply and demand.

Payer Power Over Pharma

Four interdependent forces have transformed the pharma-payer relationship: the aging of the industry; novel information technologies; the multi-faceted roles of payers; and growing economic pressures. Over the last 15 years, the pharmaceutical industry has transitioned from the commercial stage to the competitive stage of its lifecycle. As in other mature industries, companies in this stage are selling to very experienced, sophisticated buyers who choose among numerous competing brands and generics or, in some cases, do not purchase at all. New information technologies enable these payers to capture and leverage extensive, real-world product data that is better than the companies' own research data. For example, the 15,000 physicians at Kaiser Permanente, the largest private payer-provider in the United States, obtain more drug usage information from Kaiser's integrated information systems than from pharmaceutical companies.